The IRS issued Notice 2020-50 (Notice) on June 19, 2020, which mainly provides additional guidance on and expansion of Coronavirus-Related Distributions (CRDs) created under the Coronavirus, Aid, Relief, and Economic Security (CARES) Act.

Related Read: IRS Provides Additional Required Minimum Distribution Relief for Taxpayers Affected by the Coronavirus Pandemic

Coronavirus-Related Distributions briefly explained

The CARES Act created CRDs, which allow individuals the ability to withdraw up to $100,000 from a retirement plan or an IRA in 2020.  An individual may only withdraw $100,000 in the aggregate from either or both, in total. In addition, the CARES Act waives the 10% early withdrawal penalty on CRDs for individuals under age 59½.  CRDs are allowed favorable tax treatment in that they may be included in income ratably over three years.  Individuals may also repay any part or all of their CRDs back to a retirement plan or IRA within three years of distribution.

To be eligible for a CRD, you must be a qualified individual.  Under the CARES Act, a qualified individual is defined as an individual:

• Who is diagnosed with COVID-19;

• Whose spouse or dependent is diagnosed with COVID-19; or

• Who experiences adverse financial consequences from:

• Being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;

• Being unable to work due to lack of childcare due to COVID-19; or

• Closing or reducing hours of a business owned or operated by the individual.

Expansion of Coronavirus-Related Distributions

The eligibility conditions for adverse financial consequences under the CARES Act are all centered on the individual rather than a household experiencing adverse financial consequences.  The Notice expanded the list of eligible individuals who qualify for a CRD by focusing on the household.

The list of a qualified individual was expanded to include an individual’s spouse and a member of the individual’s household.  A member of the individual’s household is someone who shares the individual’s principal residence.  The above CARES Act adverse financial consequences now apply to the individual, individual’s spouse and household member. Instead of simply looking at an individual’s situation, you may now be eligible as a household, should you experience any of these adverse financial consequences due to COVID-19.

The Notice also added new conditions that qualify as adverse financial consequences that are as a result of:

• Having a reduction in pay (or self-employment income) due to COVID-19;

• Having a job offer rescinded; or

• The start date for a job delayed due to COVID-19.

Previously, individuals who experienced a reduction in hours worked were eligible for a CRD, yet anyone that had their compensation reduced was not eligible. Now anyone that has experienced a reduction in pay due to COVID-19 qualifies, even if it is a temporary reduction.

Additionally, CRDs are not limited to the amount of the need due to your adverse financial consequences.  Qualified individuals may withdraw up to $100,000 without regard to an individual’s or household’s need for funds.

CRD Self-Certification

The Notice provides a model form of an individual certification that may be used by a plan administrator or financial institution for a retirement plan or IRA CRD’s.  The model form declares the individual to be qualified and must be signed by the qualified individual.

Should a financial institution not provide a certification when attempting a withdrawal, it is recommended that the individual copy the certification from the Notice onto letterhead, address it the financial institution, and date and sign it.  Send it to the financial institution and keep a copy of it with your records.  The individual certification may be found in IRS Notice 2020-50 on pages 9 and 10.

Other CRD Provisions

The Notice added a number of other specific distributions, which are allowed to qualify as CRDs under the Notice as follows:

• Hardship distributions;

• Periodic payments and RMDs;

• Loan offsets; or

• Any distribution received by a qualified individual who is a beneficiary.

Since the adoption of CRDs is optional some retirement plans may not allow CRDs, but do allow hardship distributions.  A qualified individual may, therefore, request a hardship distribution from their retirement plan, but treat it as a CRD on their individual income taxes.  The three-year repayment rule still applies to hardship distributions treated as CRDs.

Like hardship distributions, individuals may treat periodic payments, RMDs already withdrawn and loan offsets in the same manner.

Keep in mind, CRDs paid to a beneficiary from an inherited account may not be rolled back into an inherited account, or any other retirement plan or IRA.  Although the three-year repayment does not apply to inherited accounts, these distributions are still eligible for the three-year favorable tax treatment under the CARES Act.

For more information on the retirement relief notice or the CARES Act, contact your ORBA advisor or 312.670.7444.  Visit ORBA.com to learn more about our Employee Benefit Plans Services.